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Saturday, September 29, 2012

... but the long term bullish momentum remains intact (actually is the second week in a row on the downside).

So, should the bulls worry about this? Well, it depends on what time frame they are trading, if they're trading on long term they have nothing to worry about (yet) but the intermediate time frame looks neutral at the moment with EMAs almost touching and SPX barely above rising SMA 120. However, we had a similar situation at the beginning of September and nothing happened, bulls pushed SPX another 60 points on the upside.

Daily chart shows a DMI barely positive, with a 3 months uptrend line climbing to 1,415. This is a very important level for those trading on intermediate time frame. Between 1,400 and 1,420 we have a decent volume both during the August-September and March-april periods.

On the upside there is not too much resistance ahead, the only significative volume at this level occurred only 4-5 years ago.

With QE3 starting soon bulls may push market further up before a significant drop. I don't think the enthusiasm around QE3 is over due to the last too weeks market ended in red. More likely, as I warned you in previous posts market cooled off a little bit since it went ahead of itself. Remember when SPX was over 30 points above EMA 50 on two hours chart I warned you that the market was overbought in short term and a cool off was expected.

However, if you are in the bears' side let's look at a possible scenario, market moving bellow the 3 months rally uptrend line (around 1,415). At exactly the same level (1,415) we find SMA 50 on daily chart. From the previous two big corrections we can easily see that the drop bellow SMA 50 (but also with SMA 50 starting to point down) was the "kiss of death". I will think about this scenario if I see a sudden move on the downside next week, or market rising to 1,467 then moving down again 20-30 points. A higher high (above 1,480) will cancel the bearish scenario. But, as usual, let's not anticipate too much!

Gold and silver finished flat this week after a nice rally. The long term is definitely bullish at the moment with weekly DMI clearly on green. Please also note the "golden cross" on both gold and silver.

Let's have a look now at VIX. Well, what can I say about VIX rather than that it's at a very low level but slightly above the April's low? This looks bearish but keep in mind that VIX can go even lower than it is at the present time. During 2005-2007 rally it stayed around 10-12, a good percentage bellow the current level.

However, since its peak in October 2008, every time VIX hit a low, it didn't last for too long, market undergoing a significant correction. Since VIX it's so low a smart move would be to buy volatility here (I think there is an ETF called VXO for this purpose).

Even if market is going to go further up for a while, VIX won't go too much down but a correction is going to send VIX spiking. Another good move in my opinion could be buying some straddles on index ETFs or individual stocks that tend to go with the market. A straddle means buying a "call" and a "put" at the same time, so you are both long and short. Since you are hedged, the risk is minimum. However, if volatility spikes your "put" is going to appreciate at a much faster pace than the losses suffered by your "call". You can't lose more money than the cost of the call but your "put" has unlimited gain potential.